Fed closes in on excess pay

Federal Reserve

With a renewed focus on bankers' pay closing in, Federal Reserve officials warn top bankers to start reigning in employee pay packages as soon as possible - even before the Fed finalizes proposed compensation rules.

The move by the Fed comes as the Wall Street Journal (WSJ) reports that pensions for top executives rose an average of 19 percent in 2008, with more than 200 executives seeing pensions increase by more than 50 percent - despite the vulnerability of the market.

According to the WSJ, the main reason for the growth was down to generous pension formulas, based on executive pay. These were then bolstered by arcane techniques that have received little scrutiny, including increases triggered when an executive reaches a certain age or when companies change interest rates used to calculate pensions.

Consistency

Now though, after a series of meetings and conference calls across the US yesterday, US Fed officials have told executives at top financial services institutions that they need to determine whether their compensation structures were consistent with a proposal from the central bank published in October, that is aimed at curbing bonuses.

Bankers' pay packages have come under renewed scrutiny after the G20 Summit in Pittsburgh in September led to new policies pertaining to pay being agreed by world leaders. What's more, with the public outraged over lavish pay and big bonuses, the Fed has proposed new rules, which won't be finalized until the end of the year, and aim to prohibit banks from awarding incentives that drive traders, loan officers and others to take excessive risks that could threaten a firm's health.

Non-combative

The meetings held yesterday between Fed officials and executives have been described as helpful and co-operative. This is because economists expect many banks to avoid pushing back against the proposals, partly because they don't strictly put caps on pay.

According to Scott Talbott, senior vice president of the Financial Services Roundtable, a trade group representing large financial companies: "It's about a balance. Its about being comprehensive."

He told the WSJ, "What regulators don't want to do is set specific pay caps, as that would be overregulating. Instead part of the Fed's plan is to encourages banks to adjust bonuses to reflect the riskiness of certain activities, defer payments of certain awards and base bonuses over longer-term performance."

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